Daily Management Review

Colombia : A New Tiger in Latin America


07/31/2015


Relatively recently, the majority of investors in Latin America had little choice: Brazil, Mexico and Chile. However, today the situation has changed dramatically. The region has now a new group of countries that are highly attractive for international investments. "New Tigers" of Latin America, as they are often called, have the young population, growing middle class, rather low debt burden level and dynamically developing economy. Colombia is the most prominent among them.



The jump of the entrepreneurial spirit

According to the OECD rating, Colombia has the fourth largest economy in Latin America. Short-term growth prospects of its economy remain strong in accordance with OECD standards and with Latin America as a whole. The forecasting economic growth level of the country (in accordance with the OECD) will be equal to 3.3% this year and 3.7% next year. Also in 2014, Colombia was among the top countries that had concluded the largest number of international investment agreements (according to UNCTAD data - Canada (7) Colombia (3), and Ivory Coast (3)).

According to the International Monetary Fund, this year Colombia's economy will triple in comparison to 2005. Other countries in Latin America have also achieved similar results, but they do not have such notorious criminal background that used to be in Colombia. The homicide rate is still high in Colombia, but it is at the lowest point in the last ten years, according to the government.
Colombia's middle class has grown by 50%. This growth is the result of attracting the corporate investments. Starbucks opened its first caffee in Bogota in July last year, planning to open 50 more over the next five years. Car companies note the rapid growth of sales in Colombia.

- Ford, GM, Mistsubishi see the growing market in Colombia. People have money they can spend, - said Eric Farnsworth, vice president of the nonprofit organization Council of the Americas. - In Colombia, much more entrepreneurial spirit has appeared.
Many people say that the diversification of the economy and the country's open policy for foreign investments are the secret of this success. US export to Colombia has been increased by almost 400% since 2003 and trade agreements with Canada and Europe have been signed. The country is part of the Pacific Alliance - Latin America trade group developing relations with Asia. It is obvious that foreign investments are pushing the Colombia's economy, giving impetus to the economic growth and government revenues.
Flickr / Mariusz Kluzniak (CC)
Flickr / Mariusz Kluzniak (CC)

Relying on oil

However, not only investments make Colombia one of the top countries in Latin America. Recently, the country was considered a net importer of oil. Over the past seven years, the production of oil in Colombia has almost been doubled and now it's the fourth largest oil producer in the region and the fifth US oil exporter. Partly because of the oil boom, the economy of Colombia increased by 4.8% last year. Also, the country is a home to one of the 25 largest oil companies in the world - the state company Ecopetrol stands at 169 place in profit and at 277 in sales in the Forbes lists 2015. In fact, it became the most valuable company in Latin America in 2013, when its market capitalization rose to $129 billion, being ahead of Petrobras from Brazil, which has oil production level three times higher.

But the hitch is that the country focused on sales of raw materials can be in a difficult situation because of the budget revenues reducing and the inability to keep the same level of social programs for low-income citizens. Such a development could lead to the growth of social tensions.

According to the forecasts made by Credit Suisse, the reduction of incomes from the oil sales will increase the current transactions deficit to 5.1% of the gross domestic product (GDP). According to the Bancolombia's estimates, they also increase the budget deficit to 3% of GDP, even though the weaker peso increases its own value due to the export of oil, which is expressed in dollars. Despite the fact that the government has recently raised taxes in order to help bridge the budget deficit, the further adjustment may still be needed.

Numbers are still numbers, but let's look at facts. Let's take the small town of Puerto Gaitan, which produces around 25% of the country's oil. The working places number fell by 7 thousand over there because of investments lack. The government estimates that the Colombian national industry can lose 25 thousand working places, which is 25% of total employment rate in prduction field.

The economy basis

Thus, foreign investment and oil sector are crucial for the economy of Colombia. They both can be used in the fight against poverty. What is more, it would be logical to combine them in order to strengthen both directions, creating a solid basis for a strong economy. From this perspective, the government made a reasonable step forward by offering economic concessions to some of the 130 oil companies operating in the country. According to the National Hydrocarbons Agency, in 2012 $ 5.5 billion was invested in this field. In addition, the guarantee of international investments legal security, along with the possibility of avoiding double taxation and the free economic zones in the country, create rather attractive environment for investment.

Colombia turns towards Europe, France at the front

In 2014, the Colombian president Juan Manuel Santos admitted that France could be considered to be the largest foreign employer in Colombia. It is believed that French companies, including Thales, Saint-Gobain, Alcatel, Casino and Renault, create more than 90 000 direct and 200 000 indirect jobs.

In June 24, 2015, French Prime Minister Manuel Valls went to Latin America with an official visit to Colombia and Ecuador. During the trip, which lasted until June 27, important agreements were signed, which should raise the status of Colombia abroad, according to Valls.

In general, both these countries discussed the peace process in the South American country and the development of economic and trade relations between the two countries. In the city of Medellín Valls opened a new French school. In addition, an agreement for a loan in the amount of 275 million euros was signed to support rural development in areas affected by the hostilities.

Also, under the Conference of the Parties to the UN Framework Convention on Climate Change, which is to be held later this year in Paris, the message on sustainable development and green growth was delivered by European countries. The green growth is one of the most important factors, which is often used for world cooperation. In May 2014, Veolia Water Technologies, the world leader in water management solutions, won a $ 73 million contract with Ecopetrol for the construction of the water treatment unit to the south-east of Bogota. Patrick Couzinet, Business Development Director at Veolia Water Technologies, comments:

- We are pleased to see that our mutual cooperation not only brings significant benefits to both sides, but also stimulates the proper economic growth of the country. I believe that the green tech technology, combined with top-notch technologies (in this case, we are talking about the deployment of energy efficient technologies in order to minimize the oil trail - author's note), raise the country's image in the eyes of international investors. It shows Colombia as a spearhead of modern industrial ecology who cares not only about the use, but also the preservation of the unique nature of the region.

The unusual decision - successful outcome

These unusual solutions for attracting investors give their results. Thus, in the Doing Business rating, which is held annually by the World Bank, Colombia was at the 34th place in 2015. This rating is important not to place Colombia itself, but a sharp jump, which country has made over the past few years. While some countries in Latin America, such as Argentina, Chile, Costa Rica and Brazil, which were considered to be very attractive, lost some positions, others went up sharply, and Colombia was among them, which used to be on the 87th place. This rating takes into account many factors of attractiveness for doing business in the country, including the easy way of starting business, the existence of suitable transport infrastructure, the ability to attract qualified staff, and many others.







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